ECN Capital Corp

TSX:ECN

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, and welcome to ECN Capital Corp's Third Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call to your host, Katherine Moradiellos. You may begin.

[Katherine Moradiellos, executive]

Thank you, Ross. Good afternoon, everyone, and thank you all for joining this call. Joining us today on the call are Steven Hudson, Chief Executive Officer of ECN; Jacqueline Weber, Chief Financial Officer of ECN; Lance Hull, President of Triad Financial; Matthew Heidelberg, Chief Operating Officer of Triad Financial; James Barry, Chief Financial Officer of Triad Financial; Michael Opdahl, President of Source One; and Hans Kraaz, Founder and CEO of IFG.



A news release summarizing these results was issued this afternoon and the financial statements and MD&A for the 3-month period ended September 30, 2024, have been filed with SEDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentations section of the company's website.



Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I will refer you to the cautionary statement section of the MD&A for a description of such risks, uncertainties and assumptions.



Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct. You should note that the company's earnings release, financial statements, MD&A and today's call include references to non-IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. All figures are presented in U.S. dollars unless explicitly noted. With that, I will now turn the call over to Steve Hudson.

[Steven Hudson, executive]

Thank you, Kathy, and good evening. I'm very excited to announce our best quarter in 2 years with $0.05 of EPS compared to our guidance of $0.04 to $0.06. I'd like to highlight 5 items for you on the Q3 overview. First, Hurricane Helene and Milton impacted originations in Q3, but we are recovering in Q4. Notwithstanding a very active storm season with 5 hurricanes impacting our operating areas, our operating businesses have performed exceedingly well. Second, Jackie will speak in a moment to our extension of our senior line of credit.



Well done, Jackie. Third, Triad's operating income for the quarter of $26.7 million is $18.8 million higher than Q3 of '23. Fourth, the operating income of our RV Marine business came in at $3.3 million, which is up 43% year-over-year. And finally, the acquisition of Paramount Capital, our internal servicing platform for RV Marine closed in the third quarter. This platform is consistent with ECN's proven playbook to develop strong noncyclic recurring revenue, just like we did with Triad's $6 billion servicing business. Lance, over to you.

[Lance Hull, executive]

Thank you, Steve. As Steve mentioned, our adjusted operating income for the quarter was up to $26.7 million. It was driven in large part by a 74% year-over-year increase in origination revenue. However, it's important to note the contribution from our floor plan, rental and servicing businesses as well. In 2017, when ECN acquired Triad, the company had no commercial or servicing business as Triad was a strictly gain on sale operation. But again, consistent with the ECN playbook of adding and then growing relevant businesses, Triad established first an industry-leading servicing team and then later an effective floor plan and rental business.



We continue to expand those businesses and have developed them into a diversified recurring and noncyclical revenue stream that represented 35% of our revenue in Q3, and we expect this balance to continue into 2025. Lastly, I'll just highlight the reference to our expanded flow arrangements. In order for us to continue to be the lender of choice for a growing number of homebuyers, we must continue to develop new and grow our existing funding partnerships.



We were excited to announce the extension of the Blackstone program in October, and that extension, along with the continued relationships with Carlyle, Monroe and our many long-standing bank and credit union relationships, brings our total funding arrangements to more than $1.9 billion year-to-date.



Moving over to Slide 9. Steve also mentioned in his opening comments that we did see some negative impact to originations in September due to Hurricanes Helene and Milton. And while that impact may be felt for a period of time in Q4, our business remains resilient and recovery is well underway. You'll notice in the pie chart that our origination mix has shifted toward chattel for the quarter, now representing more than 77% of our total originations. And as Chattel is our highest margin business, that helped drive a higher origination revenue margin for the quarter as well. And then lastly, on this slide, our community and rental originations were also up for the quarter, reflecting the completion of the flow agreement with Monroe.



On to Slide 10, a quick look at our approvals. Q3 approvals remained strong and our pipeline growing throughout the quarter. Chattel approvals increased 17% year-over-year in Q3 and remain up 21% year-to-date. And encouragingly, this trend is continuing into Q4 with October Chattel approvals up 39% year-over-year. In addition to the growth in Chattel, we continue to see activity increasing in our Land Home group. For the quarter, Land Home approvals were up 30% year-over-year, and these approval trends in both Land Home and Chattel and our pipeline growth bode well for future originations.



Moving over to Slide 11. This is a slide we shared in the past, and it shows the shipment growth trends continuing to rise through Q3. In fact, the industry now up 15% year-over-year. And it's good to see growth in activity for the industry. But the real takeaway for this slide is the impact from the overwhelmingly strong demand for affordable housing across the country. Developing solutions for affordable housing are key initiatives for both political parties and the demand has never been stronger. And for this reason, regardless of changes in interest rates or consumer sentiment, we see strong growth opportunities ahead for Triad, and we're well positioned to capitalize on this opportunity. And now I'll ask Matt to share some portfolio updates.

[Matthew Heidelberg, executive]

Thanks, Lance. Starting on Slide 12. We're happy to report that both delinquencies and net charge-offs remain low. and our managed assets continue to grow, ending the quarter at $5.5 billion, which will drive continued recurring revenues for Triad in future quarters.



Moving you to Slide 13. Commercial balances ended the quarter at $425 million, which includes both rental and floor plan. Yields and performance remain strong. And as a reminder, these yields do float with market rates. Moving you on to Slide 14, give you a quick update on Champion Financing. Champion Finance continues to perform very well. Active balances, you see on the bottom left of this chart are up 33% quarter-over-quarter while still maintaining a growing pipeline you see in the approved orders and unused credit lines. These balances not only will drive diversified revenue but also generate 2.5x retail volume for us as these balances continue to grow.



Lastly, moving to Slide 15. You've seen this slide in the past. It gives you a quick update on our historical quarterly originations. And with that, I'll hand it over to Hans.

[Hans Kraaz, executive]

Thanks, and great job to our team at Triad. Awesome, awesome quarter.



Moving to Slide 17. We're firing on all cylinders, and I'm excited to share some very positive updates from Marine and RV. Originations for the third quarter. Operating income before tax was up 43% year-over-year. Originations of almost $275 million was up 30% year-over-year. July and August increased by a whopping 40%. September was only 3%, but that was due to the multiple hurricanes that we experienced.



Turning to Slide 18. I'm only going to touch briefly on this slide, but it shows the accelerated growth we are experiencing. Moving to Slide 19. IFG's business update. I'm excited to share some very positive updates from IFG, all of which make me incredibly proud. Let's dive into our third quarter results. We achieved an 18% year-over-year increase in originations, driven largely by a very strong July and August.



September, as I said before, was soft due to the impact of Hurricane Helene. Even more encouraging is our October performance. Despite another hurricane Milton, our team came back with exceptional performance and effort. We ended October up 41% year-over-year, a testament to the team's resilience and dedication. Not only are we seeing robust consumer demand, but our bank partners continue to show strong interest in our loan products. This demand, coupled with the growth in our dealer network is creating substantial momentum.



As I mentioned in our last quarter, this year, we have signed up more dealers than any other time in our company's history, and this trend is continuing. This past quarter, we welcomed 7 new sales staff who together bring over 150 years in marine lending experience. We expect this team to produce an additional $75 million in originations over the next year. With this solid foundation in place, I'm confident we are poised for a very, very strong year-end. And with that, I'll hand it off to Mike Opdahl.

[Michael Opdahl, executive]

Thank you, Hans, and congratulations on a great quarter. Good afternoon, everyone. Please turn to Slide 20. I'm very pleased to report that Source One's mix share take share strategy is yielding strong results. Our third quarter originations increased by 63%, and the fourth quarter started just as promisingly with October originations up nearly 70% despite expected seasonal slowdowns, we're well positioned with third quarter approvals up 42% and October is up 46%, giving us a pipeline of nearly $40 million as we move into winter.



Looking ahead, 2025 is shaping up well as our growth initiatives gain momentum. We've added 4 new sales reps, expanding our reach to 46 states. We're actively executing our take share strategy with our look-to-book ratio up almost 19% and per dealer penetration increasing by 20%.



Regarding ECN's acquisition of Paramount Capital, we're no longer dependent on an external servicer, allowing us to scale more confidently. Their best-in-class platform and technology facilitated a quick and successful migration of our RV & Marine portfolios. The quality of reporting and transparency we now have offers a level of visibility into portfolio performance that was previously unavailable. With the ongoing integration of specific back-office functions with IFG, combined with better data to drive strategic growth, we are improving operational efficiency and cost structures across RV & Marine .



Now on to Slide 21. Key takeaway. IFG and Source One are successfully executing their growth strategies, significantly outpacing the industry. To put our third quarter gains in context, the anticipated recovery in RV & Marine sales has been slow to materialize as the combination of high interest rates and election year uncertainty resulted in a slight decrease in unit registrations. However, wholesale shipments have increased for 4 consecutive quarters, following the pattern we saw in manufactured housing, and we are confident of the predicted recovery next year. Bearing that in mind, Source One originations are up 45% year-to-date and October originations matched our 2022 volume, making it our best October ever.



With a 40% increase in approvals last month, IFG and Source One have robust pipelines as we close out the year. Our investments in systems, teams and combined synergies position us strongly. Similar to the recovery of Triad, we're confident that when the market rebounds in 2025, we'll be well placed to lead. Jackie, over to you.

[Jacqueline Weber, executive]

Thank you, Mike. Turning to Page 24 for our consolidated operating highlights. Overall, our Q3 operating results remain on plan with adjusted operating income of $19.5 million compared to $2.3 million in the prior year quarter, which was driven by increased revenues across each of our businesses.



Adjusted net income to common shareholders was $13.1 million or $0.05 per share, consistent with our guidance range of $0.04 to $0.06 per share. Turning to Page 25, looking at the balance sheet. Our total balance sheet is down approximately $85 million from Q2 and over $200 million from the prior year. I'd like to highlight that during the quarter, we completed a 3-year extension of our senior credit facility, which provides for $770 million in funding through October 2027, which was within our target range of $750 million to $800 million.



Turning to Page 26. Loan origination revenues were $37.8 million in the quarter, up from $23 million in the prior year, which reflects loan mix and margin improvement at Triad and growth in origination volumes at RV & Marine . Servicing revenues were up to $17.5 million, driven by growth in managed assets at Triad as well as the launch of servicing at RV & Marine . Interest expense and interest income each decreased as a result of lower on-balance sheet finance assets in 2024.



On Page 27, manufactured housing operating expenses increased from the prior year, reflecting elevated expenses related to new funding agreements. RV & Marine operating expenses were up as a result of continued investments that we're seeing drive the business forward as well as the impact of the acquisition of Paramount. And lastly, on Page 28, we ended the quarter with under $300 million in our on-balance sheet portfolio, which includes just under $230 million at Triad and $70 million at RV & Marine . Now I'll turn it over to Steve.

[Steven Hudson, executive]

Thanks, Jackie. Before commenting on Slide 30, our 2025 guidance, let me start by thanking the 700 members of our employees in the field. Many of our employees and their families had significant challenges during this very active season. So we thank you for your hard work. Vero Beach got hit by 19 hurricanes, and it just was shut down just for a day. It's amazing. By way of background to our 2025 guidance, I'd like to focus on the corporate simplification plan. The '25 business plan provides for the completion of the corporate simplification plan. As many of you will know, that was first approved by ECN's Board in the second quarter of '23.



The simplification plan will conclude in early part of '23 by combining ECN and Triad, eliminating duplication of overhead costs at the 2 companies. Triad's Jacksonville, Florida office will become ECN's corporate headquarters. Corporate functions will be integrated with Triad, resulting in $5.5 million to $6.5 million of cost savings. As many of you remember, in 2021, when we sold Service Finance, we were successful eliminating $12 million of annual corporate cost. RV Marine will continue to operate as a strong and vibrant subsidiary. All of this it's all possible because Lance Hull has built a deep and talented senior management team at Triad, and that's the catalyst for us in terms of executing this this expense reduction plan now. Our guidance for 2025 is between $0.19 and $0.25, and I would reference you on a midpoint of $0.22. James?

[James Barry, executive]

Thank you, Steve. Turning to Slide 31. Triad is guiding to $1.7 billion to $1.9 billion of originations in 2025, inclusive of the Champion Finance JV activity. This represents year-over-year growth of 23% at the midpoint. In terms of mix, our highest margin chattel product is expected to grow 17% and represents 70% of total 2025 originations. Our community rental and Land Home offerings are expected to grow at a higher rate of approximately 40% and will comprise 25% and 5% of total loan production, respectively.



Turning to Slide 32. This table converts our expected production mix into forecasted origination revenue. We expect a blended origination revenue yield of 6.5% with higher-margin Chattel offset by lower-margin community rental and Land Home volume. Slide 33 summarizes our 2025 origination and managed balance KPIs, along with our forecasted P&L. Origination revenue generated from our target 2025 loan production is expected to comprise 55% of total revenue, with the balance of revenue driven by growth in managed balances from our commercial and servicing businesses to $6.75 billion at the midpoint.



Operating expenses includes additional overhead and interest expense from the corporate simplification plan of integrating ECN corporate functions into Triad in 2025. And with that, I'll turn it back to Steve to review the RV & Marine 2025 outlook.

[Steven Hudson, executive]

Thank you. Turning to Slide 34. Let me highlight 3 items on this slide. The originations of $1.2 billion to $1.4 billion, I would anchor you more on the $1.4 billion. If you look to H2 '24, we have an average of about $290 million a quarter. So I think the $1.2 billion is a low watermark. The $1.4 billion is a better mark. Managed assets reflect Mike's earlier comment about Paramount financing. We like that because of the recurring stable income. And that ties into my last comment on the adjusted operating income of $16 million to $26 million. I would anchor you more to the higher end. 40% of that income is driven by our servicing business.



Turning to Page 35 in terms of the cadence of our $0.19 to $0.25 quarter-by-quarter has been laid out for you. I would comment specifically on the fourth quarter '25, which historically has been a seasonal quarter but with larger servicing revenue and commercial finance revenue, floor plan and rental, we've now been able to smooth out the seasonality of our business. And finally, on Slide 36, which is the consolidated 2025 forecast for both Triad and RV Marine and servicing, strong earnings of $61 million to $78 million for the year, coupled with, as I mentioned earlier, the strong recurring noncyclic servicing revenue and the cost reductions we've announced earlier this evening.



And finally, on Page 38, my closing comments. We've had an exceptional third quarter, our strongest in 2 years with $0.05 of earnings. Triad's earnings remain ahead of plan. Origination momentum in RV Marine is strong. As many of you know, the MH industry turned around in '24. Our view is that the RV Marine business will see that same similar turnaround in 2025. In fact, we're seeing it in the fourth quarter. The revenue guidance includes the corporate simplification cost take outs. We believe our '24 earnings will approximate current consensus, notwithstanding the hurricane season, and we're issuing guidance of $0.19 to $0.25 and our dividend is maintained. With that, operator, I'd open the call for questions.

[Operator]

[Operator Instructions] And our first question comes from Nik Priebe from CIBC.

[Nikolaus Priebe, analyst]

So you alluded to some changes that you made to the senior credit facility. And I'm aware that you've got a series of bonds that go current at the end of the year. Is that part of the plan to address the refinancing there? Like is extinguishing the bonds using the capacity on the senior credit facility an option for you.

[Steven Hudson, executive]

We believe that those bonds are due on December 31 of this year. We believe we'll refinance those bonds. The senior line is dedicated to financing on balance sheet assets. That said, we have strong cash flow, which could be another source, but we feel very confident in our ability to refinance those December 31 debentures.

[Nikolaus Priebe, analyst]

Got it. And just sticking on the same topic, I've always kind of struggled with the concept of leverage for your business model specifically because the credit facility that you have is a bit of a hybrid facility. If I look through the debt that is drawn specifically for the purpose of funding finance receivables, how levered is ECN today? Or how do you think about leverage in that context?

[Jacqueline Weber, executive]

So our senior credit facility and the drawn balance is fully supported by our on-balance sheet assets.

[Nikolaus Priebe, analyst]

Okay. So there wouldn't be like a 70% advance rate or something of that nature. I can think of it as being 100 -- essentially 100%.

[Jacqueline Weber, executive]

There is an advance rate. But if you look at our accounts receivable and our finance assets across both businesses, it exceeds the senior line balance.

[Nikolaus Priebe, analyst]

Okay. Okay. I see. And then just last question. I'm just trying to understand exposure to some of these disruptive weather events like the Atlantic hurricane season. Can you give us a rough sense for what proportion of originations would be based in the state of Florida or the Southeast U.S. in general?

[Hans Kraaz, executive]

Yes. Triad, Florida is our third largest state for origination. So it's a significant portion of our origination business. And I don't see this as being a permanent disruption by any means. It's a temporary slowdown in business as our retailers, and for that matter, the conditions for site placement of homes improves. And as they dry up and as we get these cleared up, I think we'll be right back on track.

[Steven Hudson, executive]

And if I could just add one other thing, Nick. As you know, these are all HUD approved both on design and construction and delivery. These homes have a 40-to-50-year life. We're only aware of one claim for a home that was materially damaged. It's really been -- the conditions are such that you can't, what they call, set a home. If the ground is wet or you can't get in, you can't set the home. But we've seen, Hans commented earlier, that we've seen a nice recovery in the marine business in October, and we're starting to see that in the manufactured housing sector.

[Operator]

And our next question comes from Jaeme Gloyn from National Bank Financial.

[Jaeme Gloyn, analyst]

A question on the 2025 guidance, I suppose. Just broadly speaking, what gives you the confidence to be able to achieve this guidance that you set out today, especially in light of what we've seen recently in -- with previous guidance provided. So I just want to get a sense as to like what is the foundation to be able to provide this guidance at this stage?

[Steven Hudson, executive]

I'm not sure about the comment about previous guidance. I'm not going to revisit '23, but we've been on the mark, Jaeme, for the last several quarters, last 3 quarters. Our guidance in terms of what gives us the confidence as a team, it's the forward order book at our strategic partnership with Champion, increasing deliveries. You've seen the deliveries from Champion into the field and further penetration into that joint venture also gives us guidance that we've been able to streamline the business under Lance's leadership with Matt Heidelberg and with James Barry, taking out significant cost.



And finally, we've had increased demand for our institutional investors for our loan product. We've been able to materially increase the economics on the gain on sale and the loan servicing rights values. And as I mentioned earlier in my opening remarks, Jaeme, that the RV marine business, particularly looking at this quarter, is recovering, and we believe it's going to go through the same cyclic recovery that MH did in '24 as we're starting to see now in '25.

[Jaeme Gloyn, analyst]

Yes. Understood. On the guidance or in Triad, where would we see the JV with Champion show up in this guidance? Or how much is it contributing to the 2025 guidance that you're providing today?

[Matt Nelson, executive]

Yes, James, this is Matt. Unfortunately, our partner there in Champion is another publicly traded company. So we're sensitive to that. We give you an update on the floor plan, kind of how that's tracking, but we want to be sensitive to other partner without giving too much information on their behalf.

[Steven Hudson, executive]

We did cut and paste the quote from Mark Yost on the Champion call, which speaks to the success of the joint venture and their view on -- they're very happy with the joint venture.

[Operator]

And our next question comes from Tom MacKinnon from BMO.

[Tom MacKinnon, analyst]

With respect to Slide 33 and the Triad guidance, you talked about additional expenses there as a result of kind of folding in the head office into Triad. Can you quantify what those additional expenses that you've added in there are to reflect that?

[Jacqueline Weber, executive]

On the expense side, Tom, so there's some corporate overhead. It's primarily interest, though. So the interest that you used to see in the corporate segment is primarily now it will be pushed down to the businesses.

[Tom MacKinnon, analyst]

Okay. So right now, corporate is kind of running at, I don't know, $2.5 million a quarter, $10 million a year. You're going to save $5 million to $6 million. Is the rest just -- what happens to the rest then? Like essentially, you're losing all the corporate expenses, which are running at a run rate of $10 million. You're not -- it doesn't look like you're adding any of those overhead expenses into Triad and yet the guidance doesn't have any corporate expenses at all as I see it then. So are you really actually going to cut like $10 million in corporate expenses in this plan?

[Steven Hudson, executive]

You're eliminating ECN, Tom, if I take it back to '23 when Champion made their investment in us, we committed to a corporate simplification plan. We -- Lance has created a very strong and robust team in Jacksonville. We don't think -- you don't need 2 legal departments. You don't need 2 risk departments. You don't need others. So it will be a complete elimination of ECN.

[Tom MacKinnon, analyst]

Okay. So from what we're seeing, that's producing $2.5 million or $2.5 million in expenses this quarter will be completely eliminated.

[Steven Hudson, executive]

Yes. And it starts, Tom, you have 1 quarter delay, you're doing all the work now. We're deep into it. Let's say it's finally all of it is completed by March 31. I think you're trying to reconcile the $10 million back to the $5.5 million to $6.5 million. So it's 3/4 of that.

[Tom MacKinnon, analyst]

Right. Okay. And then I guess the second is what would be driving some of this increase in service revenue that you're seeing at Triad right now? Is that just managed assets floor plan? Is there anything else that is helping drive that increase in servicing revenue that we're seeing here?

[James Barry, executive]

Yes. This is James from Triad. So servicing yield during the quarter benefited from 2 factors. It's the mix of our servicing loan portfolio and then total loan sale volume during the quarter. So the servicing fees for our Silver and Bronze product are roughly 40% and 150% higher than our core product, respectively. So as we originate more of these products to meet the demand of our investor partners, Triad servicing yield will increase. And separately, we sold $165 million more loans to investor partners quarter-over-quarter, increasing our managed assets and servicing revenue. And as previously noted in the guidance, we expect to realize a servicing yield of 80 to 90 basis points in 2025.

[Operator]

And our next question comes from Stephen Boland from Raymond James.

[Stephen Boland, analyst]

Sorry, I jumped on late, maybe to just address. But following up on Tom's questions. Obviously, the service revenue is benefiting -- sorry, there was a little bit of blip there in terms of -- you said 80 -- sorry, was it 80 to 90 or I can't remember -- I couldn't hear that number.

[James Barry, executive]

Yes, I was referring to the 2025 guidance. It's 80 to 90 basis points in 2025.

[Stephen Boland, analyst]

Basis points. And again, I haven't had time to dig into these numbers, but even the loan origination revenue seems quite robust quarter-over-quarter. Is there anything like that's kind of onetime there, change in mix, change in funding partners, things like that?

[James Barry, executive]

Yes. So it's a similar story where it's Q3 benefited from higher gain on sale margin from the mix of sold production and the total loan sale volume. So we sold $150 million increase quarter-over-quarter on our highest margin core chattel product. And then we also had increased Land Home sales activity, which was up $14 million quarter-over-quarter. So this higher loan sale activity coupled to being weighted to a higher-margin product drove an increase in gain on sale margin during the quarter. And as we previously mentioned, we expect the gain on sale margin to approximate 6.5% in 2025.

[Steven Hudson, executive]

I think, Steve, it's important to note that when you reported on the first loan flow program with Blackstone, we were in an 80-10-10 mix, 80% core, 10% silver and 10% bronze. Today, these mixes with various partners are 60% core, 30% silver and 10% bronze, and silver and bronze are more profitable. Again, those mixes are driven by the institutional investor demand, not us, but it does help our margins.

[Operator]

And that was our last question. At this time, I'd like to thank everybody for joining today's conference call and webcast. You may now disconnect, and have a great night.